Last Updated: December 15, 2008
The Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced on Dec. 16, that it was liquidating Bernard L. Madoff Investment Securities LLC of New York, NY, under the Securities Investor Protection Act (SIPA).
In the wake of that firm's liquidation, investors are seeking the lessons to be learned from what has been described at the largest ever Ponzi scheme in American history. To be sure, the lessons are many. But major themes are emerging.
Be your own best advocate
From an individual investor's point of view, FPA board member, Bonnie A. Hughes, CFP®, of The Enrichment Group, suggests that now more than ever is the time to become financially literate. Now is the time to consider diversifying not just your assets, but perhaps diversifying with whom you entrust your money. Now is the time to become your own best advocate. Now is the time to adopt the phrase "constant vigilance" as your mantra. "Do your own due diligence," said Hughes.
Most advisers are selected because a personal referral. But while a personal referral is helpful, it's no substitute for doing an extensive background check of the people with whom you might entrust your money. Interview current and, if possible, former clients. Also, examine the adviser's and/or firm's records online. Information about a Registered Investment Advisor (typically Form ADV) can be found either at the Securities and Exchange Commission's Web site, www.sec.gov, or your state securities division. Visit the North American Securities Association's Web site at www.nasaa.org to find your state's contact information. Information about a registered representative can be found at the Financial Industry Regulator Authority's Web site at www.finra.org.
Once you have an adviser, ask hard questions about performance. Said Hughes: "Believe the answers you don't necessarily like. When an adviser refuses to promise a specific return because it is unknown, believe it."
Hughes also said Americans should not accept the "it's proprietary" answer when they ask an investment adviser about strategy or tactics. "It's your money," she said. "You should always be able to repeat how it's invested, where it's invested, why it is invested that way, who it's invested with, when you'll get it back and 'I got a guy' is not an investment strategy."
FPA member Curt Weil, CFP®, president of Lasecke Weil Wealth Advisory Group, LLC, agrees with that advice. "Beware of any scheme whose particulars are secret," he said. "What's more, he suggests that you make sure your assets are held at a public custodian, one with which you can verify your account independently."
Indeed, make sure your funds are held in custody by a well-known third party institution. In addition, when making deposits into your accounts, never write a check out to the adviser's firm. Always, make sure the check is made out to the name of a broker-dealer or mutual fund firm or insurance firm, whichever firm is the custodian of the money.
Indeed, it's important to examine or hire someone to examine your financial statements. Typically, most financial statements will have a footer that notes through which firm securities are offered through. It's easy to verify the name of the broker/dealer at the FINRA Web site. It might also say whether the firm is a member of FINRA/SIPC.
In most all cases, your statements, all of which are mailed quarterly if not monthly, should specify the names of the securities held, ticker symbols, account values, all of which would be relatively easy to verify. When in doubt about the veracity of the statement, consider getting a second opinion from a qualified financial professional.
Experts also note that regulators such as the SEC, FINRA, state securities divisions, and CFP Board are among those whose mission it is to protect investors. Investors should learn which regulatory body is responsible for regulating which advisers and under what conditions.
Indeed, many Americans are also scurrying to examine their brokerage statements, wondering whether their money is safe with their broker and financial planner. In most cases, the answer is yes. But it's important to do your due diligence to learn what protections are in place. If your money is held by a brokerage firm, chances are your money is covered by insurance provided by the Securities Investor Protection Corporation or SIPC.
SPIC, according the organization's Web site, "is the U.S. investor's first line of defense in the event a brokerage firm fails, owing customer cash and securities that are missing from customer accounts. SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds."
According to the organization's Web site, "the statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities - such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000.This figure includes a maximum of $100,000 on claims for cash.
For more information about SIPC, see "The Investor's Guide to Brokerage Firm Liquidations." It's also important to learn what protections are in place when money is lost due to theft, fraud or dissolution. If your money is held by a registered investment advisor, check what, if any, insurance your adviser has to cover for your account should there be any acts of malfeasance.
Work with an adviser whose services are delivered according to standard of care
Another lesson learned is the importance of working with an adviser or financial planner who delivers financial planning services according to a Standard of Care. In September, the Financial Planning Association® (FPA®) announced a Standard of Care for financial planning professionals. The Standard of Care clarifies the role of a fiduciary adviser subject to the Investment Advisers Act of 1940 and when providing material elements of financial planning services under CFP Board's recently revised Standards of Professional Conduct. According to the Standard of Care, all financial planning services will be delivered in accordance with the following standard of care:
- Put the client's best interests first;
- Act with due care and in utmost good faith;
- Do not mislead clients;
- Provide full and fair disclosure of all material facts; and
- Disclose and fairly manage all material conflicts of interest.
Learn more about FPA's Standard of Care.